Medium-size farm - is a farm employing up to 12 A variety of forms of informal finance have emerged to

workers. replace the moneylender and pawnbroker in some

instances. These include local rotating savings and credit
Cash crops - are crops produced entirely for the market. associations and group lending schemes. In the case of
rotating savings and credit associations (ROSCAs),
Agrarian Structure - refers to ways in which which can be found in such diverse countries as Mexico,
agricultural system is developed on the land and Bolivia, Egypt, Nigeria, Ghana, the Philippines, Sri
includes land ownership, cropping system, and Lanka, India, China, and South Korea, a group of up to
institutions. 50 individuals selects a leader who collects a fixed
amount of savings from each member. This fund is then
Rotating Savings and Credit Association - is a group allocated (often randomly but frequently also sequenced
formed by formal agreement through internal bidding) on a rotating basis to each
among 40 to 50 individuals to pool their savings and member as an interest-free loan. ROSCAs enable people
allocate loans on a rotating basis to each to buy goods without having to save the full amount in
Member. advance. With a ROSCA, individuals can make their
A 2009 study estimated that 2.5 billion adults do not use planned purchases in half the time, on average. Many
formal services to save or borrow. As low-income people prefer to save and borrow this way,
noted earlier in the text, much economic activity in repayment rates are extremely high, and participation is
developing nations comes from small-scale very active. Noting that ROSCAs are often formed by
producers and enterprises. Most are no corporate, married women, Siwan Anderson and Jean-Marie
unlicensed, unregistered enterprises, including Baland have proposed that they serve another important
small farmers, producers, artisans, tradespeople, and purpose when wives’ bargaining power in the family is
independent traders operating in the informal urban and otherwise limited. Because the funds made available
rural sectors of the economy. Their demands for through membership in the ROSCA cannot be drawn on
financial services are unique and outside the purview of until the wife wins a turn to receive the kitty, this
traditional commercial bank lending. For example, street restriction prevents her husband from demanding access
vendors need short-term finance to buy inventories, to her growing savings for immediate consumption
small farmers require buffer loans to tide them over before enough has been saved to purchase her targeted
uncertain seasonal income fluctuations, and small-scale item, such as a sewing machine.
manufacturers need minor loans to
purchase simple equipment or hire nonfamily workers. Landlord is the proprietor of a freehold interest in land
In such situations, traditional commercial banks are both with rights to lease out to tenants in
ill equipped and reluctant to meet the needs of these return for some form of compensation for the use of the
small borrowers. Because the land.
sums involved are small (usually less than $1,000) but
administration and carrying costs are high Family farm is a farm plot owned and operated by a
and also because few informal borrowers have the single household.
necessary collateral to secure formal-sector
loans, commercial banks are simply not interested. Most Transaction Costs are costs of doing business related to
don’t even have branch offices in rural villages, small gathering information, monitoring, establishing reliable
towns, or on the periphery of cities where many of the suppliers, formulating contracts, obtaining credit, etc.
informal activities take place. Thus most no corporate
borrowers have traditionally had to turn to family or Subsistence farming on small plots of land is the way
friends as a first line of finance and then warily to local of life for the majority of African people living in
professional money lenders, pawnbrokers, and agriculture-based economies. The great majority of farm
tradespeople as a backup. These latter sources of finance families in tropical Africa still
are extremely costly—moneylenders, for example, can plan their output primarily for their own subsistence. The
charge up to 20% a day in interest for short-term loans to main exceptions are in former colonial settlement areas
traders and vendors. In the case of small farmers like the White Highlands of Kenya; sugar, cocoa, coffee,
requiring seasonal loans, the only collateral that they and other plantations in East and West Africa; and farms
have to offer the moneylender or pawnbroker is their devoted to such export crops as green beans in Niger, cut
land or oxen. If these must be surrendered in the event of flowers in Kenya and Ethiopia, and legumes in
a default, peasant farmers become rapidly transformed Tanzania.)
into landless laborers, while moneylenders accumulate Since the basic variable input in African agriculture is
sizable tracts of land, either for themselves or to sell to farm family and village labor, African
large local landholders.
agriculture systems are dominated by three major agricultural labor productivity throughout much of
characteristics: Africa. As long as population size remained relatively
(1) the importance of subsistence farming in the village stable, this historical pattern of low productivity and
community; shifting cultivation enabled most African tribes to meet
(2) the existence of some (though rapidly diminishing) their subsistence food requirements. But the feasibility
land in excess of immediate requirements, of shifting cultivation has now broken down as
which permits a general practice of shifting cultivation population densities increase. It has largely been
and reduces the value of land ownership as an instrument replaced by sedentary cultivation on small
of economic and political power; and; owner-occupied plots. As a result, the need for other
(3) the rights of each family (both nuclear and extended) nonhuman productive inputs and new technologies
in a village to have access to land and grows, especially in the more densely populated
water in the immediate territorial vicinity, excluding agricultural regions of Kenya, Nigeria, Ghana, and
from such access use by families that do not Uganda. Farm size has also fallen in countries such as
belong to the community even though they may be of the Malawi and Tanzania. Moreover, with the growth of
same tribe. Where traditional systems towns, the penetration of the monetary economy, soil
are breaking down, inequality is often increasing further. erosion and deforestation of marginal lands, and the
The low-productivity subsistence farming characteristic introduction of land taxes, pure subsistence-agricultural
of most traditional African agriculture practices are no longer viable. And as land becomes
results from a combination of three historical forces increasingly scarce, land degradation is increasing in
restricting the growth of output: scope. The 2008 World Development Report concluded:
1. In spite of the existence of some unused and Higher productivity is not possible without urgent
potentially cultivable land, only small areas can be attention to better soil and water management.
planted and weeded by the farm family when it uses only Sub-Saharan Africa must replace the soil nutrients it has
traditional tools such as the short-handled hoe, the ax, mined for decades. African farmers apply less than 10
and the long-handled knife or panga. In some countries, kilograms of fertilizer per hectare, compared with more
use of animals is impossible because of the tsetse fly or a than 100 kilograms in South Asia. Programs to develop
lack of fodder in the long dry seasons, and traditional efficient fertilizer markets, and agroforestry systems to
farming practices must rely primarily on the application replenish soil fertility through legumes, need to be scaled
of human labor to small parcels of land. up.
2. Given the limited amount of land that a farm family Subsistence farming is the farming in which crop
can cultivate in the context of a traditional production, stock rearing, and other activities are
technology, these small areas tend to be intensively conducted mainly for personal consumption.
cultivated. As a result, they are subject to
rapidly diminishing returns to increased labor inputs. In Informal Finance (Traditional Informal Finance)
such conditions, shifting cultivation is the most Informal finance are loans not passed through the formal
economic method of using limited supplies of labor on banking system—for example, loans
extensive tracts of land. Under shifting cultivation, once between family members.
the minerals are drawn out of the soil as a result of
numerous croppings, new land is cleared, and the Money lender is a person who lends money at high rates
process of planting and weeding is repeated. In the of interest, for example to peasant
meantime, formerly cropped land is allowed to recover farmers to meet their needs for seeds, fertilizers, and
fertility until it can be used again. Under other inputs.
such a process, manure and chemical fertilizers have
been unnecessary, although in most African Sharecropper is a tenant farmer whose crop has to be
villages, some form of manure (mostly animal waste) is shared with the landlord, as the basis for
applied to nearby plots that are intensively cultivated in the rental contract.
order to extend their period of fertility;
3. Labor is scarce during the busiest part of the growing Diversified farming Diversified or mixed farming
season, planting and weeding times. At therefore represents a logical intermediate step in the
other times, much of the labor is underemployed. transition from subsistence to specialized production. In
Because the time of planting is determined by this stage, the staple crop no longer dominates farm
the onset of the rains and because much of Africa output, and new cash crops such as fruits, vegetables,
experiences only one extended rainy season, the demand coffee, tea, and pyrethrum are established, together with
for workers during the early weeks of this rainy season simple animal husbandry. These new activities can take
usually exceeds all available rural labor supplies. The net up slack in farm workload during times of the year when
result of these three forces had been slow growth in disguised unemployment is prevalent. For example, if
the staple crop occupies the land only during parts of the
year, new crops can be introduced in the slack season to State trading - Governments, especially those with
take advantage of both idle land and family labor. And socialist and communist economies,
where labor is in short supply during peak planting sometime grant monopoly importing rights to state
seasons, simple labour-saving devices (such as small enterprises. Thus, private companies cannot
tractors, mechanical seeders, or animal-operated steel import goods.
plows) can be introduced to free labor for other farm
activities. Finally, the use of better seeds, fertilizers, and Agricultural sector - comprise establishments primarily
simple irrigation to increase yields of staple crops such engaged in growing crops, raising
as wheat, maize, and rice can free part of the land for animals, and harvesting fish and other animals from a
cash crop cultivation while ensuring an adequate supply farm, ranch, or their natural habitats.
of the staple food. The farm operator can thus have a Traditionally in economic development, agriculture has
marketable surplus, which she can sell to raise her been assumed to play a passive and
family’s consumption standards or invest in farm supportive role. Its primary purpose was to provide
improvements. Diversified farming can also minimize sufficient low-priced food and manpower to
the impact of staple crop failure and provide a security the expanding industrial economy, which was thought to
of income previously unavailable. The success or failure be the dynamic “leading sector” in any
of such efforts to transform traditional agriculture will overallstrategy of economic development. Lewis’s
depend not only on the farmer’s ability and skill in famous two-sector model, discussed in Chapter 3, is an
raising his productivity but also, even more important, example of a theory of development that places heavy
on the social, commercial, and institutional conditions emphasis on rapid industrial growth with an agricultural
under which he must function. Specifically, if he can sector fueling this industrial expansion by means of its
have reasonable and reliable access to credit, fertilizer, cheap food and surplusnlabor. Nobel laureate Simon
water, crop information, and marketing facilities; if he Kuznets introduced an early schema, noting that
receives a fair market price for his output; and if he can agriculture made four “contributions to economic
feel secure that the and his family will be the primary development”: the product contribution of inputs for
beneficiaries of any improvements, there is no reason to industry such as textiles and food processing, the
assume that the traditional farmer will not respond to foreign-exchange contribution of using agricultural
economic incentives and new opportunities to improve export revenues to import capital equipment, the market
his standard of living. Evidence from such diverse contribution of rising rural incomes creating more
countries as Colombia, Mexico, Nigeria, Ghana, Kenya, demand for consumer products, and the factor market
India, Pakistan, Thailand, and the Philippines shows that contribution, divided between the labor contribution
under the proper conditions, small farmers are (Lewis’s manpower)— workers not needed on farms
responsive to price incentives and economic after agricultural productivity was raised could then
opportunities and will make radical changes in what they work in industry—and the capital contribution (some
produce and how they produce it. Lack of innovation in farm profits could be reinvested in industry as
agriculture, as noted earlier, is usually due not to poor agriculture became a steadily smaller fraction of national
motivation or fear of change but to inadequate or income). The capital contribution has been misapplied as
unprofitable opportunities. In Africa, lack of information a “squeezing of the peasantry,” but it meant investing
is often a constraint, but farmers learn from each other first in agriculture and later reaping profits that would be
when valuable new crops and techniques are introduced partially reinvested in industry. As can be seen from this
locally. This facilitates dissemination of new description, however, the framework implicitly—and
technologies. ironically—still treats industrialization rather than rural
Diversified (mixed) farming is the production of both modernization as the core development goal.
staple crops and cash crops and simple Today, most development economists share the
animal husbandry typical of the first stage in the consensus that far from playing a passive,
transition from subsistence to specialized supporting role in the process of economic development,
farming. the agricultural sector in particular and
Tariffs - It refers to a tax imposed on imports as they the rural economy in general must play an indispensable
enter a country. It is commonly levied as a specified as part in any overall strategy of economic progress,
valorem percentage of the value of imports. especially for the low-income developing countries.
An agriculture- and employment-based strategy of
Quotas - It refers to a quantitative restriction in limiting economic development requires three basic
imports of a particular product to a complementary elements:
specified number of units, or to a certain value in a given (1) accelerated output growth through technological,
period of time. institutional, and price incentive changes
designed to raise the productivity of small farmers; small-farmer agricultural progress, the provision of
(2) rising domestic demand for agricultural output physical and social infrastructure, the
derived from an employment-oriented urban development of rural nonfarm industries, and the
development strategy; and capacity of the rural sector to sustain and
(3) diversified, non-agricultural, labor-intensive rural accelerate the pace of these improvements over time.
development activities that directly and Green revolution is the boost in grain production
indirectly support and are supported by the farming associated with the scientific discovery of new
community.2 To a large extent, therefore, hybrid seed varieties of wheat, rice, and corn that have
agricultural and rural development has come to be resulted in high farm yields in many
regarded by many economists as the sine qua developing countries.
non of national development. Without such integrated
rural development, in most cases, Agrarian Reform - encompasses the entire agriculture
industrial growth either would be stultified or, if it sector from production to distribution. i.e. pricing,
succeeded, would create severe internal availability, distribution etc.
imbalances in the economy
Integrated rural development The broad spectrum of
rural development activities, including
Shantytown

Immigrant - Immigrant is an international migrant who enters the area from a place outside the country* A person who
comes to live permanently in a foreign country.

Emigrant - is an international migrant departing to another country by crossing the international

boundary. A person who leaves their own country in order to settle permanently in
Another.
Shifting Dry Farming - is the informal and often usurious in most developing countries
(especially in rural areas) where low-income farms and firms with little collateral borrow from
moneylenders at exorbitant rates of interest.

Sedentary Dry Farming

International Migration - refers to the movement within the same country. Out-Migrant is a person who
between countries. moves out of a area within the same country.

Land Tenure - who owns or controls the land In-Migration - is the movement into a new
politically/geographically/administratively defined area
Communal tenure - land held by village where villagers within the same country. In-Migrant is a person who
enjoy usufruct (right to use and profit) moves into a new area within the same country.

Estates - large estates where wage laborers are VAT - is a levy on value added at each stage of the
employed by private sector firms (agri-business), or production process.
plantations held by public sector The conventional wisdom in recent years has been that
switching to a broad-based value added
Freehold - outright ownership with land being tax (VAT) would improve economic efficiency;
transferred and divided equally among (usually males) encouraged by development agencies, such tax
reforms have accordingly been undertaken in many
Out-Migration - is the movement out of a developing countries. However, this approach has been
politically/geographically/administratively defined area challenged recently. In particular, welfare may be
worsened when the ability of the informal economy to To facilitate industrial growth in economies
remain effectively untaxed introduces new distortions in characterized by a scarcity of financial capital,
the economy. The impact on human capital accumulation development banks have sought to raise capital, initially
raises further complexities. focusing on two major sources:
(1) bilateral and multilateral loans from national aid
Direct Taxes - is a tax levied directly on individuals or agencies like the U.S. Agency for
businesses—for example, income taxes. International Development (USAID) and from
international donor agencies like the World Bank
Indirect Taxes - are taxes—including customs duties and
(tariffs), excise taxes, sales taxes, value added taxes (2) loans from their own governments. However, in
(VATs), and export duties— levied on goods purchased addition to raising capital, development banks have had
by consumers and exported to develop specialized skills in the field of industrial
by producers. project appraisal. In many
Group lending scheme - scheme is a formal cases, their activities go far beyond the traditional
arrangement among a group of potential borrowers to banker’s role of lending money to creditworthy
borrow money from commercial or government banks customers. The activities of development banks often
and other sources as a single entity and then allocate encompass direct entrepreneurial, managerial, and
funds and repay loans as a group, thereby lowering promotional involvement in the enterprises they finance,
borrowing costs. including government- owned and -operated industrial
In the case of village banking, or group lending schemes, corporations.
a group of potential borrowers forms an association to
borrow funds from a commercial bank, a government The growth and spread of development banks in the
development bank, an NGO, or a private institution. The developing world have been substantial. By
group then allocates the funds to individual members, 2000, their numbers had increased into the hundreds, and
whose responsibility is to repay the group. The group their financial resources had ballooned
itself guarantees the loan to the outside lender; it is to billions of dollars. Moreover, although the initial
responsible for repayment. The idea is simple: By sources of capital were agencies such as the
joining together, a group of small borrowers can reduce World Bank, bilateral aid agencies, and local
the costs of borrowing and, because the loan is large, can governments, the growth of development bank
gain access to formal commercial credit. With at least finance has increasingly been facilitated by capital from
implicit joint liability, group members have a vested private investors, institutional and
interest in the success of the enterprise and therefore individual, foreign and local. Almost 20% of the share
exert strong pressure on borrowing members to repay on capital of these banks was foreign-owned,
time. The evidence shows that repayment rates compare with the remaining 80% derived from local investors.
favorably with formal-sector borrowers. In spite of their impressive growth, development banks
have come under mounting criticism for
Development banks - is a specialized public and private their excessive concentration on large-scale loans. Some
financial intermediaries that provide privately owned finance companies (also categorized as
medium- and long-term credit for development projects. development banks) refuse to consider loans of less than
Development banks are specialized public and private $20,000 or $50,000. They argue that smaller loans do not
financial institutions that supply medium- justify the time and effort involved in their appraisal. As
and long-term funds for the creation or expansion of a result, these finance companies almost totally remove
industrial enterprises. They have arisen in themselves from the area of aid to small enterprises,
many developing nations because the existing banks even though such aid is of major importance to the
usually focus on either short-term lending for achievement of broadly based economic development
commercial purposes (commercial and savings banks) and often may constitute the bulk of assistance needed in
or, in the case of central banks, the control and the private sector. We may conclude, therefore, that in
regulation of the aggregate supply of money. Moreover, spite of the growth of development banks, there remains
existing commercial banks set loan conditions that are a need to channel more financial resources to small
often inappropriate for establishing new enterprises or entrepreneurs, both on the farm and in the marginal or
for financing large-scale projects. Their funds are more informal sector of urban areas and nonfarm rural
often allocated to “safe” borrowers (established activities, who often are excluded from access to credit
industries, many of which are foreign-owned or run by at reasonable rates of interest. In an attempt to respond to
well-known local families). True venture capital for new these needs of small-scale borrowers, a whole array of
industries rarely obtains approval. informal credit arrangements has emerged in the
developing world.
Financial Repression - refers to the constraints on
investment resulting from the rationing of credit, usually
to a few large borrowers, in financial markets where
interest rates and hence the supply of savings are below
market-determined levels.
The restriction of loans to a few large borrowers,
together with the widespread existence of high
inflation, growing budget deficits, and negative real
interest rates, led to a serious “credit crunch”
among developing countries during the 1980s. The
global recessions of 1981–1982 and 1987
exposed the frailty of many development bank loans so
that by the end of the decade, almost half
of these banks were reporting 50% or more of their loans
in arrears and another quarter had
delinquency rates in excess of 25%. With real interest
rates on savings deposits in the negative
and expectations of continued inflation and
exchange-rate devaluation contributing to substantial
capital flight, it is not surprising that few individuals
were willing to save.
In addition, commercial banks and other financial
intermediaries were subject to numerous lending
restrictions and faced mandatory interest-rate ceilings on
loanable funds at levels well below market-clearing
rates. These artificial interest-rate ceilings were often set
by governments seeking to finance their budget deficits
through the sale of low-interest bonds to private
commercial banks. These banks in turn had to resort to
rationing the available credit beyond the normal credit
rationing observed in developed economies as a response
to adverse selection.

Transparency - (financial) In finance, full disclosure by

public and private banks of the quality
and status of their loan and investment portfolios so that
domestic and foreign investors can make informed
decisions.

Organized Money market - is the formal banking

system in which loanable funds are channeled through
recognized and licensed financial intermediaries.

Unorganized Money market - is the informal and often

usurious in most developing countries
(especially in rural areas) where low-income farms and
firms with little collateral borrow from
moneylenders at exorbitant rates of interest.